Barnier to unveil ‘bail-in’ proposals

Michel Barnier, the European commissioner for the internal market, will next week open up another battlefront in his campaign to extend the scope of European Union financial legislation by announcing plans for EU-wide bank recovery and resolution rules.

Barnier believes that the financial crisis and the accompanying series of disorderly banking failures have shown up serious weaknesses in existing arrangements to prop up, or break up, struggling banks.

Until now, banks have been supported by governments using public money, but Barnier’s proposal is to shift responsibility away from taxpayers and onto the bank’s existing bondholders – a concept known as ‘bail-in’, as opposed to the ‘bail-out’.

The approach is controversial. Critics suggest that ‘bail-ins’ will make it harder for banks to raise money and will make investors nervous.

Publication of the proposal has been delayed by more than a year as Barnier has waited for the sovereign-debt crisis to calm down. However, the renewed problems in Spain’s banking sector have made the issue pressing and it will be put to the college of European commissioners on Wednesday (6 June).

The proposal would allow national regulators to take emergency control of struggling banks, split them up and impose losses on bondholders.

Resolution funds

The Commission is also expected to propose resolution funds – financed by a levy on banks – to be used when institutions get into trouble, as a means of shielding the taxpayer from the cost. Recognising the cross-border nature of some of the EU’s largest banks, the Commission is to suggest that funds in different member states work more closely together.

The draft law will also demand preventive measures including requirements for institutions and authorities to set out plans for how they would deal with serious difficulties, and for resolution strategies, or ‘living wills’, in case of bank failure.

The proposals are likely to prove controversial with many member states – all of which must support the plan before it can become law. Germany’s government has opposed any move to use its money to support banks in countries such as Greece and Spain. The British government is likely to resist any loss of control over when and how to rescue its financial institutions.

Barnier has described the proposal as “the final missing piece of the puzzle” for the EU to implement the commitments agreed by G20 countries for reducing systemic risks in the banking sector.